Joint work with Soumya Sen. Work-in-progress, check back soon for updates!

Abstract

On many digital platforms (e.g., Xbox Game Pass, PlayStation Now), first-party and third-party content developers co-create content for a bundle, where the total bundle revenue is shared between the two parties. On such platforms, platform functionality (e.g., Software Development Toolkits or hardware features) is an important strategic lever to facilitate content creation by reducing the marginal content production costs of content developers. At the same time, it may also influence other platform decisions such as revenue-sharing and first-party content quality. However, providing platform functionality, developing first-party content, and sharing more revenue can all involve significant investments and opportunity costs. It is therefore important for platforms to coordinate their use of these three strategic levers to manage their ecosystems.

We introduce a holistic model that jointly accounts for platform functionality, revenue-sharing between first- and third-party content developers, and first-party content quality as decision variables. Doing so allows us to uncover new insights into the interactions among these strategic levers. We found that the platform's optimal revenue-sharing may first increase then decrease as the platform continues to develop functionality when the first-party content developer has a lower marginal cost of content development than the third-party content developer. Moreover, the platform tends to choose a lower platform functionality when the degree of cost asymmetry between first-party and third-party content developers is small. When either content developer has a cost advantage, the platform is more incentivized to provide a higher platform functionality.

We also provide managerial insights on how entrant and incumbent platforms facing different market conditions should coordinate their use of the three strategic levers to maximize their profits.